Leif got nailed for filing a false return, and the nailing included a restitution order for $775K. Leif and co-defendants paid this off within a year.

Fast forward a year, and IRS Examination reports Leif owes a total of $686K of tax plus penalty. It takes IRS another nine months to send Leif a SNOD, from which Leif petitions, claiming he never got credit for the money he already paid as restitution. But Leif never filed Form 4089-B, Notice of Deficiency–Waiver, for the year at issue.

And petitioning the SNOD holds up assessment until Tax Court decides whether or not to uphold the deficiency as determined by Exam.

“The parties agree that there is a deficiency of $392,083 and a section 6663 penalty of $294,062 for tax year…. The parties, however, disagree about the treatment and characterization of petitioner’s restitution payments. This dispute boils down to an issue of timing. Petitioner requests that we treat the restitution payments as payment in satisfaction of his deficiency and section 6663 penalty for tax year…. Respondent, however, is statutorily prohibited from crediting petitioner’s account until the deficiency and the section 6663 penalty are assessed. See secs. 6201(a)(4), 6213(a), (b)(5); see also Schwartz v. Commissioner, T.C. Memo. 2016-144.” 2017 T. C. Memo. 52, at p. 5.

Tax Court’s jurisdiction to review a deficiency depends upon there being a deficiency. Section 6211(a) defines a deficiency as the difference between tax actually due, minus tax shown on return, minus prior deficiency assessments (or collections if no assessment), plus rebates.

Restitution orders are estimates of damages to the fisc, but aren’t assessments. It’s a classic YMMV (your mileage may vary).

The restitution wasn’t shown on Leif’s original return, there were no prior deficiency assessments or rebates, and IRS can’t assess the amount of the deficiency even though both IRS and Leif agree how much that is, and Leif’s restitution covers it.

“By failing to waive restrictions on assessment and filing a petition in this Court, petitioner has effectively prevented respondent from doing exactly what he is requesting respondent to do–reduce the amount due by amounts remitted before petitioner received the notice. See sec. 6213(a). After the amount of petitioner’s restitution order was summarily assessed, respondent determined an income tax deficiency for petitioner’s tax year…. Upon making that determination, respondent was statutorily obligated to send petitioner a notice of deficiency before assessing the deficiency and the section 6663 penalty. See sec. 6212(a). Respondent has stipulated that following entry of a final decision in this proceeding, he will assess the income tax deficiency…, the penalty pursuant to section 6663…, and interest as provided by law for tax year…. And respondent will credit petitioner’s account with the restitution payments, as of the date of those payments, against those civil tax assessments.” 2017 T. C. Memo. 52, at pp. 11-12.

As for interest in these restitution-assessment jumpballs, see my blogpost “Als Ob,” 11/22/16.

I don’t fault Leif’s attorney for shooting in a petition. Given the Draconian 90-day cutoff, I submit one has no choice. As for not filing the 4089-B, it’s easy to play Monday morning quarterback. So I’ll let it go at that.

An author, teacher, advocate and trusted advisor, Lew Taishoff is a New York City-based attorney with 51 years of experience in corporate and individual tax and real estate matters. He is an Enrolled Agent, examined and admitted to practice before the Internal Revenue Service, and admitted to practice before the United States ... Continue reading →